Fluctuations in Exchange Rate and its Impact on Macroeconomic Performance of Pakistan

The present study was conducted to examine the extent and direction of exchange rate volatility and its impact on macroeconomic performance of Pakistan. It is implied that exchange rate volatility has direct bearings on macroeconomic variables and thus on macroeconomic performance. This study also investigates the effect of exchange rate (independent variable) of Pak Rupee to US Dollar on selected three dependent variables i.e. inflation rate, import and export balance of Pakistan. The annual observations from 2000-2010 are considered for analysis, which are collected from different secondary sources. A significant association between the exchange rate and inflation rate as well as annual imports is observed. On the other hand no significant association is recorded between the exchange rate, and annual exports. Overall, the results suggest that the explanatory variables and dependant variable are highly correlated and thus the policy makers in Pakistan should consider both the existence and the degree of the exchange rate volatility and notice the likely impact of volatility on each macro-economic variable in implementation of the trade policies, so that the external value of our currency be stabilized.